Brazilian Government Investing $22 Billion in Sugarcane and Ethanol Production

Brazil's government unveiled new financing and other incentives for sugarcane ethanol production on Monday, vowing to work closely with the private sector to boost production in an industry that has struggled recently despite its immense promise.

The state-run development bank BNDES announced that it would provide 30 billion to 35 billion reais ($19 billion to $22 billion) to finance expansion in the sugarcane sector through 2014, a major bet equivalent to about two-thirds of the industry's annual output.

The head of Brazil's ANP energy regulatory agency, Haroldo Lima, told a major investor conference the best way for the government to prevent regular shortages in the sugar cane-based biofuel was to provide the conditions so that investment could increase "not in the medium term, but in the short term."

The enthusiastic, business-friendly message from Mr. Lima and other officials including Energy Minister Edison Lobao came as a surprise, given that Brazil's left-leaning government assumed regulatory control of ethanol earlier this year. Some investors in the sector fear stronger government intervention, such as the setting of production targets.

"It's important to consider that the sector is going through a new phase of challenges," Mr. Lobao said. "These are challenges that together, government and business, we are going to face and overcome."

Mr. Lobao said the government is working with private-sector representatives to formulate a regular 10-year investment plan – a period that is expected to see demand for ethanol roughly double in tandem with Brazil's booming economy.

Producers at the conference said some kind of stimulus had been badly needed. Despite high prices for the biofuel and a massive expansion in the domestic fleet of cars that use it, Brazil's roughly $30 billion a year sugar cane industry has struggled with stagnant investment and insufficient supply.

Officials from President Dilma Rousseff's government have criticized ethanol producers for what they describe as a failure to invest and plan – and, thereby, a failure to prevent cyclical ethanol shortages that prompted a near-revolt among consumers at the pump earlier this year.

Producers, meanwhile, say they are boxed in by regulatory uncertainty, uneven taxes and enduring financial wreckage from the 2008-09 global crisis. After growing at an annual average rate of 10 percent since 2000, cane output in Brazil rose by no more than 3.3 percent per year starting in 2008.

The industry's relative troubles have not cooled the ardor of multinational energy companies and other foreigners who have poured billions of dollars into the sector in recent years. Attendance at Monday's conference hit a new record at over 2,000 attendees, organizers said, and English, French and Russian could be heard spoken in the long lines to enter.

BNDES Chief ‘Very Optimistic’

Luciano Coutinho, the head of the BNDES, said he was "very optimistic" about the future of the sector – an important endorsement from the institution that is by far the country's biggest long-term lender.

Mr. Coutinho agreed that the top priority should be to expand supply. "There won't be any lack of support from the federal government to make that happen," he said.

Government officials and producers were discussing several measures to help encourage investment, said Jose Carlos Grubisich, chief executive of ETH, a sugar and ethanol producer. Mr. Grubisich said some possibilities include:

* Clearer guidance from the government on what the required ethanol blend in gasoline will be going forward.

* Increased use of long-term contracts between producers and distributors to help prevent future shortages.

* Creation of stocks to reduce price volatility.

Mr. Coutinho said the next wave of investments through 2012 should be focused on cane output, since crushing capacity is more than sufficient for the moment. After that, he said investments should focus on expanding existing mills, with new mills possible later this decade.

In an additional move that should broadly help the sugar cane industry, Sao Paulo Governor Geraldo Alckmin, whose state accounts for more than 60 percent of sugar cane production, said Monday his state has eliminated a tax on equipment that produces bioelectricity from sugar cane.

As Brazil's economy booms, the domestic auto fleet is expanding at a torrid 20 percent annual pace. Meanwhile, the percentage of vehicles that are flex-fuel – which can run on any mixture of gasoline and/or ethanol – is expected to rise to 86 percent by 2020 from its current level of 45 percent, according to Unica, Brazil's sugar cane industry association.

Unless the ethanol industry starts growing at a faster pace, Unica estimates that there could be an annual cane deficit of 400 million metric tons by 2020/21 – compared to current production levels of 650 million metric tons.

Multinationals including Royal Dutch Shell, Noble Group and Glencore have poured billions of dollars into the sector, although they too have focused more on acquiring existing mills than expanding production.